Lack of Disclosure from European Automakers Threatens Investors

Lack of Disclosure from European Automakers Threatens Investors

European automakers are forcing investors to "drive blindly" by not releasing information on how they will comply with a commitment to reduce the carbon dioxide emissions of their fleets. By Peter Denton

As European automakers near a deadline to reduce the carbon dioxide (CO2) emissions of their fleets, an analysis recently released by the World Resources Institute (WRI) and the Sustainable Asset Management (SAM) Group reveals that the car companies are not disclosing CO2 reduction commitments or strategies to comply with a European Union agreement to lower auto emissions.

In 1998, the European Commission and the European Automobile Manufacturers Association (ACEA) agreed to voluntarily reduce CO2 emissions of their autos to an overall fleet average of 140 grams of CO2 per kilometer (gCO2/km) by 2008. With the industry at a fleet average of 160 gCO2/km in 2002, an additional reduction of 15 percent is needed by 2008 to meet the target.

"The problem with the ACEA Agreement is that nobody knows what the auto companies are planning to do to bring the industry to its 2008 target," said WRI's Amanda Sauer, lead author of Transparency Issues with the ACEA Agreement: Are Investors Driving Blindly?

Sauer and co-authors Fred Wellington of WRI and the SAM Group's Philipp Mettler and Gabriela Grab Hartmann are concerned that without these disclosures, investors are unaware of large potential costs and competitive implications that automakers could face as they race to meet the 2008 target. Although the ACEA Agreement is voluntary, the European Commission has repeatedly stated that it will formally regulate the industry if it fails to meet the 2008 target of 140 gCO2/km.

"It is unacceptable that, with only three years left to comply with the ACEA Agreement, auto companies have done little to disclose in their annual reports to investors how they plan to meet this voluntary target," Sauer added.

In an effort to determine how individual automakers are positioned to meet the ACEA target, the authors performed a basic cost analysis for two scenarios by which the industry could comply with the agreement by 2008. In each of these scenarios - which were somewhat speculative due to the widespread lack of disclosure - European automakers face a wide range of possible cost exposures.

The companies analyzed in Transparency Issues are BMW, DaimlerChrysler, Ford, Volkswagen, Hyundai, Fiat, PSA Peugeot Citröen, Renault, General Motors, Nissan, Toyota, and Honda. While the approaches these automakers are taking to meet the 2008 targets are largely unknown, the authors determined that Toyota is the best positioned of the group to meet the ACEA Agreement.

"The lack of disclosure around the ACEA Agreement means investors cannot make informed decisions because they do not know the relative cost exposure of the automakers," said co-author Fred Wellington. "Without information on these costs - as well as their potential effect on profit margins - market valuations could be distorted."

Transparency Issues with the ACEA Agreement is part of series of analyses on the auto industry conducted by WRI's Capital Market Research Project, which aims to ensure that the financial implications of future environmental risks and opportunities facing companies are properly understood by investors and appropriately reflected in stock market valuations.

Sauer and WRI's Duncan Austin released Changing Drivers: The Impact of Climate Change on Competitiveness and Value Creation in the Automotive Industry in 2003. The report took a broad approach and helped investors make better informed decisions regarding automotive company stocks in light of emerging regulatory constraints on CO2 emissions.

In late 2004, Sauer and Wellington collaborated on Taking the High (Fuel Economy) Road: What Do the New Chinese Fuel Economy Standards Mean for Foreign Automakers? The report analyzed how car companies were positioned to meet new Chinese regulations on fuel economy.

This article has been reprinted courtesy of WRI Features.

Peter Denton is managing editor of WRI Features, an international news and features service on environment and development issues.